Sales decline for a number of reasons, including technological advances, shifts in consumer tastes, and increased domestic and foreign competition. All lead to overcapacity, increased price-cutting, and profit erosion. The decline might be slow, as in the case of sewing machines; or rapid, as in the case of the 5.25 floppy disks. Sales may plunge to zero, or they may petrify at a low level.
As sales and profits decline, some firms withdraw from the market. Those remaining may reduce the number of products they offer. They may withdraw from smaller market segments and weaker trade channels, and they may cut their promotion budgets and reduce prices further. Unfortunately, most companies have not developed a policy for handling aging products.
Unless strong reasons for retention exist, carrying a weak product is very costly to the firm and just by the amount of uncovered overhead and profit.
There are many hidden costs. Weak products often consume a disproportionate amount of managementâ€™s time; require frequent price and inventory adjustment generally involve short production runs in spite of expensive setup times; require both advertising and sales forces attention that might be better used to make the healthy more profitable; and can cast a shadow on the companyâ€™s image. The biggest cost might well lie in the future. Failing to eliminate weak pro-ducts delays the aggressive search for replacement products. The weak products create a lopsided product mix, long on yesterdayâ€™s breadwinners and short on tomorrowâ€™s.
In handling aging products, a company faces a number of tasks and decisions. The first task is to establish a system for identifying weak products. Many companies appoint a product-review committee with representatives from marketing, R&D, manufacturing, and finance. The controllerâ€™s office supplies data for each product showing tends in market size, market share, process, costs, and profits. A computer program then analyzes this information. The managers responsible for dubious products fill out rating forms showing where they think sales and profits will go, with and without any changes in marketing strategy. The product-review committee makes a recommendation for each product â€“ leave it alone, modify its marketing strategy, or drop it.
Some firms abandon declining markets earlier than others. Much depends on the presence and height of exit barriers in the industry. The lower the exit barriers, the easier it is for firms to leave the industry, and the more tempting it is for the remaining firms to stay and attract the withdrawing firmsâ€™ customers. For example, Procter & Gamble stayed in the declining liquid-soap business and improved its profits its profits as others withdrew.
According to one study of company strategies in declining industries, five strategies are available to the firm;
1. Increasing the firmâ€™s investment (to dominate the market or strengthen its competitive position).
2. Maintaining the firmâ€™s investment level until the uncertainties about the industry are resolved.
3. Decreasing the firmâ€™s investment level selectively, by dropping unprofitable customer groups, while simultaneously strengthening the firmâ€™s investment in lucrative niches.
4. Harvesting (â€œmilkingâ€) the firmâ€™s investment to recover cash quickly.
5. Divesting the business quickly by disposing of its assets as advantageously as possible.
The appropriate strategy depends on the industryâ€™s relative attractiveness and the companyâ€™s competitive strength in that industry. A company that is in an unattractive industry but possesses competitive strengthen should consider shrinking selectively. A company that is in an attractive industry and has competitive strength should consider strengthening its investment.